Hire, Fire, or Train: Innovation and Human Capital Responses to Recessions

Abstract

Research summaryWe examine how firms' relative emphasis on exploration and exploitation influence their human capital responses to recessions. We hypothesize and find that the higher the focus on exploration, the more firms invest in training, the more likely they are to hire, and the more likely they are to lay off employees during a recession. Finally, we also find that exploration‐oriented firms are more likely to combine the accumulation of human capital through training, with both hiring and firing. This indicates that firms focusing on exploration more actively pursue the opportunities created by increased labor market imperfections during recessions. These results contribute to the literature by highlighting how recessions affect firms' flow of human capital investments, and subsequently stocks, depending on their strategic orientations.Managerial summaryWe examine how firms' strategic orientations influence how they respond to recessions in terms of their human capital. We find that the higher the strategic focus on exploration of new opportunities, the more firms invest in training, the more likely they are to hire, and the more likely they are to lay off employees during a recession. The opposite is the case for firms with a higher focus on exploiting existing (cost) advantages. Finally, we find that exploration‐oriented firms are more likely to combine the three human capital responses. In sum, our findings indicate that firms emphasizing innovation and exploration of new opportunities more actively pursue the opportunities created in labor markets during recessions.